History
South Texas Oil Company bought Texas and Colorado oil assets on borrowed money, restructured its Longview debt in 2009, then filed for Chapter 11 and lost its Nasdaq listing.
2005-2006: Small beginnings and a Colorado bet
South Texas Oil Company, formerly Nutek Oil, began its recorded story in April 2005 by buying five Atascosa County, Texas leases from JGM Oil Investments, LLC for $307,426. It was a related-party deal: the seller was majority-owned by CEO Conradie and CFO Griffith. Half the price was paid in 512,377 restricted shares at $0.30, and the rest, $153,713, in monthly payments over 36 months at 7%.
In July 2005 the company agreed to raise $2.3 million in two tranches through secured convertible notes and warrants issued to Longview funds. If both tranches were received, the notes would convert into 45% of fully diluted shares, which would heavily dilute existing holders. Conradie and Griffith agreed not to sell their shares for 12 months or until milestones were met.
The record is then quiet until December 2006, when the company acquired a 37.5% working interest in about 20,000 acres of leases in the DJ basin in Northeast Colorado from Doud Oil & Gas Company. It paid with 2,419,335 restricted shares valued at $7.5 million. A further 37.5% was expected in January 2007, at a full cost of $15 million.
2007: Borrowing to build
2007 was the year of expansion. On January 31 the company received a three-year, $15 million revolving credit facility at prime plus 4%, with the lender getting 1,000,000 warrants at $10.00. In March it agreed to buy Leexus Properties Corp. for 2,000,000 restricted shares, $3 million cash and a $4 million note, completing it as a merger on April 20. Leexus brought the Giddings and Bastrop fields in south central Texas.
In May the company said its 2004 and 2005 accounts should no longer be relied upon and restated them, mainly for asset retirement obligations, expensed workover costs and a change of depletion method. The 2005 loss rose from $911,458 to $1,020,568. The statements were later amended.
A July update reported May gross production of 576 barrels of oil a day and 1,338 thousand cubic feet of gas a day, including Colorado. It also said the full Colorado purchase had not yet closed, pending an evaluation and fairness opinion. In September the credit facility was raised to $30 million, with perpetual overriding royalties (a share of production revenue) for the lender on Giddings and Bastrop. The company also bought Diversity Petroleum, LLP for $10 million: $7.5 million cash, a $1.5 million note and $1 million of restricted shares. In October Nasdaq certified the securities for listing.
2008-2009: Debt piles up, then a restructuring
The borrowing deepened. Marquis bought part of Longview's position in February 2008, and the facility was restated in April, with $2,000,000 drawn. From April the financing took the form of senior notes, with the maximum raised to $32.5 million in June and about $32.4 million outstanding by July. Interest of 12.5% was added to principal rather than paid in cash. The company's address moved to San Antonio, and Michael J. Pawelek signed as CEO.
In September 2008 Marquis bought a further $7,000,000 senior note for $6,750,000, ranking ahead of Longview's notes, with a 1.0% overriding royalty. The company also issued 403,499 shares to retire $637,614.51 of demand notes and interest.
In February 2009 the company agreed to restructure $26.1 million of debt with Longview. It closed on May 18 after shareholder approval. Longview received about 1.75 million non-voting Series A preferred shares, convertible at $0.50, for about $17.5 million of notes. The Colorado interest and a drilling rig went to Longview affiliates for $9.8 million of debt. In total $27.3 million of senior debt was eliminated, and authorized shares rose from 50 million to 200 million. Longview's conversion was capped at 9.99% ownership.
Pressure on the listing continued. In May Nasdaq said stockholders' equity of $8,974,415 was below the $10 million minimum. In June the company sold $555,000 of 14% convertible notes, convertible at $0.50, and extended the Marquis and Summerview senior notes to March 2010 at 13%. In September Nasdaq sent two more notices, over the market value of public shares and a bid price below $1.00.
2009: Chapter 11
On September 11 creditors filed an involuntary Chapter 7 petition against STO Operating Company, which the company contested. On October 29 the company and its four subsidiaries filed voluntary Chapter 11 petitions in San Antonio and kept running the business as debtors-in-possession. Nasdaq decided on October 30 to delist the stock, citing the bankruptcy and concern over shareholders' residual interest. The company did not appeal, and trading was halted on November 6 and suspended from November 10. On November 20 the court authorized a debtor-in-possession loan from Giddings Investments LLC: up to $500,000 immediately, up to $1.5 million in total, at 10%, due January 31, 2010, with first priority over all assets.
As of November 30, 2009, no plan, sale process or treatment of shareholders had been disclosed, and the outcome of the involuntary petition was unresolved. A December 3 filing recorded the exchange's removal of the stock from listing.
Written from the 22 story beats below (2005 to 3 Dec 2009), which come from the company's own announcements and filings.